Economics 101: When corporations see tax hikes looming, they will do what they can to beat the hikes

Donald Douglas noted that Costco was paying dividends early, to get the money to its shareholders in 2012, before whatever happens to tax rates happens. I said that, “we will see a December full of news of early bonuses and dividend payouts to enable investors to avoid looming higher taxes.”

As much as I’d like to pat myself on the back and crow about my prescience, that one was about as difficult as predicting that the sun will rise in the east. From

Oracle Corp. said it will pay dividends for the next three quarters early, joining other companies that are accelerating payouts ahead of likely tax increases next year.

The software company will shell out a dividend totaling 18 cents a share on Dec. 21 for its second, third and fourth quarters in fiscal 2013. Oracle typically pays a quarterly dividend of six cents a share and was scheduled to pay its next one in February.

Oracle’s chief executive and largest stockholder, Larry Ellison, didn’t participate in the deliberation or the vote on this matter, the company said.

Mr. Ellison owns about 1.1 billion shares of Oracle, or about a 23% stake, and stands to receive about $198.9 million from the accelerated dividend.

Much more at the link. But, according to my precise calculations, Mr Ellison, who will receive about $198.9 million in dividends, will owe $29.8 million in taxes on that distribution, if all are qualified dividends. Assuming that his other income is sufficient to place all of the dividends into the 35% marginal bracket if they were treated as ordinary income, which will be the case if the 2001/2003 tax cuts are not extended, Mr Ellison would owe $69.6 million in taxes on the distribution under the 2012 tax rates, or $78.4 million if the rate rises to the 2000 level of 39.4%, and he had taken the dividend in 2013. He may well save close to $50 million in taxes; is it any wonder that Oracle would choose an earky distribution?

The JOURNAL includes an interactive graphic noting 105 corporations which have announced special dividend payouts in 2012, specifically to beat the possible tax hike deadline.

Some companies, such as Wal-Mart Stores Inc., have chosen to accelerate dividends into December from 2013, while others, such as Las Vegas Sands Corp., have announced special dividends that will be paid before year-end.

Corporations exist for the sole purpose of making money for their shareholders. They do other things, primarily producing goods or services to sell in the economy, things which create jobs for working Americans, but all of those things are done to serve their raison d’être, earning money. And corporate leadership across the country can see that tax increases are probable for many of their shareholders, and that the tax rate on dividends may well double or more. These corporate leaders owe their loyalty to their shareholders, and they are doing the right thing for their shareholders.

Most corporate leaders opposed the re-election of President Obama, understanding that his policies would be bad for business and bad for their shareholders; now, they are doing what they can to minimize the harm his re-election will do to their shareholders.

If we had a simple system, such as I advocated here, we wouldn’t be seeing corporations taking steps like this to avoid tax liability; there would be no advantage to it. But as long as we retain a punish-the-producers tax system, counterbalanced with all sorts of loopholes, incentives and the like, such things will continue.

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